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A week in gold: Taper speculation finally comes to end

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Gold slipped near to a six month low as after endless debate and speculation the US Federal reserve finally started to taper its monetary stimulus measures.

The decision ended the months of “will it, won’t it” speculation, but the modest US$10bn cut in the monthly US$85bn bond buying programme and the insistence that interest rates will stay low for a long time gave some comfort to gold bugs.

Spot gold tumbled close to US$1,200 on the news, the lowest price since June, but some analysts suggested the reaction was excessive and that there was some comfort in what Fed chairman Ben Bernanke said.

According to Commerzbank, the main reason for the positive reaction of equity markets to the news is likely to have been the Fed’s expectation that the zero interest policy can be maintained even after an unemployment rate of 6.5% is achieved. 

Previously, it said, this target was regarded by market participants as a trigger for a whole series of rate hikes. 

"The fact that money will remain extremely “cheap” for a long time yet should in fact have lent  support to the gold price rather than it coming under pressure due to the end in the near  future of quantitative easing (QE3)," said the German broker. 

The comments were echoed by fixed income specialist fund manager Pimco, which said that the Fed’s desire to keep interest rates down and raise inflation to its 2% target may boost gold as real bond yields will stay low.

Data shows that the introduction of the third bout of quantitative easing by the US Federal Reserve had little benefit to the gold price, though the prospect of its being taken away has led to the sharp recent fall.

Commerzbank added that how gold performs over the next week could set the tone for how it performs in the longer term.

“If the gold price should succeed in forming a stable and long-term bottom at above $1,220 per troy ounce, investor interest is likely to pick up again – after all, the considerable uncertainty over QE3 is gone, meaning  that the spectre of “tapering” has lost its ability to scare the gold market.

“On the other hand, if the gold price were to fall below $1,200, this could provoke a renewed wave of selling.” Selling by exchange traded funds has been a steady drain on the gold price all year and showed no let-up this week.

SPDR Trust, the largest of the gold-backed ETFs, shed 4.2 tonnes on Wednesday, the day of the Fed’s announcement, to 812.6t, a third lower than the start of the year.

Spot gold Friday was trading at US$1,197, almost 27% below the price at the start of the year (US$1,673).

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